Morgan Stanley And Goldman Both Downgrade Tesla Citing China, Demand And Valuation

The $1,000 handle for Tesla may turn out to be short lived, as investment banks Morgan Stanley and Goldman Sachs have both downgraded the equity since yesterday’s close.

Perpetual bull Adam Jonas at MS downgraded Tesla from Equalweight to Underweight with a price target of $650.00, down from $680.

Among his concerns, Jonas noted capital needs and near-term demand – issues we feel like we have been hearing about for years, all the while Tesla stock has squeezed higher and higher. “We’re Underweight due to our concerns around China, competition, capital needs and near term demand. The RR skew for TSLA is consistent with an Underweight rating,” the note reads.

In the short term, Jonas is worried about demand and pricing:

“Nearer term, we acknowledge that the company must continue to navigate challenges related to restarting its Fremont facility and confronting light vehicle markets that may not be as strong as pre-COVID levels. In recent weeks, Tesla has announced price cuts in China and the US across its model range that we had not previously incorporated into our forecasts, until now.”

On a longer scale, he expressed concerns not only about China, but about inevitable competition from major companies like Amazon: 

“We believe any potential deterioration of relations with China could disproportionately impact Tesla vs. other stocks within our coverage. Our relative caution on China drives our view that Tesla shipments in the PRC peak at just under 500k units by 2027 and decline from there.”

“In a post-COVID world, we believe fewer and more powerful players will be in position to deploy capital and talent to solving autonomy with a ‘play to win’ mindset. We see Amazon (and other tech players) as clear competitors, not partners vs. the likes of Tesla and GM.”

In true sell side fashion, the note concludes with a range of price targets between $190 and $1200. 

The company was separately downgraded to Neutral from Buy at Goldman Sachs last night after the stock shot past their price target. Goldman said they remained positive on Tesla but that recent price cuts and production challenges with the Model Y could cloud the company’s near term outlook, despite issuing the downgrade in a broader note about its auto industry sales forecast, which has improved:

In conjunction with our global auto team, we are raising our outlook for auto sales in 2020 and roughly maintaining our 2021/2022 estimates, which are above IHS. We now expect global auto sales for 2020 to be -14.5% yoy (from -17% prior) and we expect 2021 to be +8.5% yoy (from +13% yoy but still at a similar absolute level). The increase in 2020 is driven by changes in our US and Europe forecasts, and in 2021 we now have a higher outlook for Europe that is generally offset by a weaker emerging markets forecast.

Goldman also cited valuation for its reasons to downgrade Tesla: “While Tesla has long been an expensive stock, and we recognize that valuation has expanded for the entire market, we believe that there is a higher bar for Tesla’s fundamentals than other stocks that may have challenging near-term results given Tesla’s premium absolute multiple along with the historical volatility of Tesla shares.”

Goldman was surprised by the company’s price cuts: “Tesla recently cut pricing on several models (which we hadn’t
anticipated occurring outside of the China market and consider to be a modest negative).”

At the same time, Goldman upgraded GM, who it said was “well positioned” for the U.S. pickup truck market and China’s recovering auto market.